The impact of building cost inflation on insurance.
Review rebuilding values to ensure they remain adequate to avoid the potential risk of underinsurance
It is estimated that during 2022 rebuilding cost inflation will be 9.6%. Construction material costs reached a 40 year high in November 2021, materials index and labour costs are anticipated to continue to rise throughout 2022.
These increases have been driven by many factors including Brexit and Covid which in turn have led to supply chain disruption and labour shortages. In addition, as the world economy recovers, the rising demand for building materials combined with other factors including the war in Ukraine and rising energy costs continue to drive inflationary pressure.
How could this affect my insurance?
Buildings Insurance policies are often based on declared sums insured which reflect the rebuilding cost of a property in the event of a total loss. Given current inflation it is important that rebuilding values are reviewed to ensure they remain adequate to avoid the potential risk of underinsurance.
The risk of under insurance
A report in 2019 by Rebuild Cost Assessment Ltd (RCAL) , a RICS accredited property valuation company, highlighted that as many as 9 out of 10 properties in the UK are insured for the wrong amount of which the vast majority (79%) are underinsured.
Given the RCAL report predated the recent rise in inflation it is likely that even more properties are now underinsured - leaving property owners facing the prospect of having a claim settlement reduced should the building sum insured be considered inadequate in the event of a loss. The potential for underinsurance is further exaggerated for heritage or listed buildings.
Business Interruption Indemnity Limits
In addition to rebuilding values, the length of indemnity period for business interruption or loss of rent cover may require reviewing to ensure they are adequate to allow a business to return to its pre-loss financial position.
With supply chain and material shortages interruption to a business following a substantial claim can last substantially longer than previously; in addition obtaining planning permission and the lead times on materials could mean it takes a considerable time to have your property reconstructed following a significant damage claim. For this reason, we would strongly recommend reviewing the length of business Interruption indemnity periods with specific attention where an indemnity limit is only selected at 12 months.
What about Index-linking?
Some insurance policies may be subject to index linking whereby sums insured are automatically increased by Insurers at renewal in line with BCIS (Building Cost Information Service) Index which take into account inflationary factors that may affect the cost of rebuilding a property.
In recent times index linking rates have been relatively low, but current inflationary factors mean that we are seeing insurers apply much higher rates of index-linking - rates of 10% or more now becoming commonplace. This will inevitably have an impact on premiums as insurers will calculate premiums based on the increased sum insured.
The combination of indexation (where applicable) and rating increases applied by insurers revaluating their risk appetites means that insurance premiums are continuing to rise.
The changing face of the UK insurance market
How can we help you?
Whilst we understand your organisation is already facing increases in many areas of expenditure, it is however essential to ensure your sums insured are as accurate as they can be to avoid underinsurance in the event of a loss
There are however areas in which we can support you to ensure you get the best result from your next insurance renewal:
Obtain a professional rebuild cost assessment of your property
This will ensure that your rebuild sum insured is accurate and avoid the risk of underinsurance.
PIB has partnerships with several RICS accredited specialists to offer either a desktop based or on site assessment of your property to provide a suitable rebuilding value . Dependant on sum insured and risk features the cost of the desktop assessments are available from £126 + vat.
Early engagement
Given the current insurance market and rising premiums, it is important to engage with us early to discuss your cover requirements and any additional risks to ensure the terms sourced adequately meet your evolving business needs. This provides us with the time necessary to negotiate the best terms and conditions on your behalf.
Mitigate risk
Investing in risk management support will not only improve the measures to mitigate risk in your business but can help with insurance costs. Pro-active risk management is a key factor in insurer’s considerations. We work with PIB Risk Management to provide tailored advice and support to help reduce insurance costs and mitigate against any future risk.
FREQUENTLY ASKED QUESTIONS
Are all policies index linked?
No, this is more prevalent in personal lines policies however some commercial policies also include it. Your renewal documentation will make this clear.
Can I choose not to index link my sum insured?
It’s crucial that your sum insured is accurate and index linking helps to maintain this in line with inflation. However, to ensure that your sum insured is accurate and we would recommend that you have a rebuilding cost assessment undertaken by an RICS accredited specialist, therefore ensuring the start point for index linking is accurate.
My policy is ‘Average Free’ so do I still need to review my sum insured?
Whilst some policies are average free (meaning Insurers will not reduce the settlement of a claim where underinsurance is found) under the Insurance Act 2015 you still have a duty of fair representation meaning that you are required to correctly declare Sums Insured. Where under-declaration is considered deliberate or reckless Insurers may decide this constitutes gross misrepresentation resulting in non payment of a claim or in some circumstances avoiding the policy.
How much does a professional valuation cost?
Through our partners we are able to offer desktop assessments which start at £95 + vat dependant on sum insured and risk features. Other options are also available including more detailed site surveys. This can prove to be competitively priced compared to other providers who base their costs on a % of the value of your property.
Can a desktop valuation be undertaken for listed buildings?
Whilst Grade 2 Listed properties can be catered for by desktop surveys, due to the specific complexities of listed buildings, it is recommended that such properties are inspected in person.
If you have any questions about the current climate and how it can impact your business please get in touch with one of our team.
Sources
https://bcis.co.uk/news/building-forecast-five-years-bcis/
27.04.2022 PIB0182